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FRM Part II · FRM Exam Part II · Liquidity Stress Testing

Which feature of a liquidity stress testing framework best demonstrates that results are actually used in management decision-making rather than treated as a compliance exercise?

Evidence of real use is that stress test results feed buffer sizing, funding limits, liquidity transfer pricing and the contingency funding plan. Passive annual reporting, self-validation by the model builders or stale scenarios indicate a compliance exercise rather than decision-useful stress testing.

  1. AScenario results are reported to the board in an annual appendix
  2. BResults inform buffer sizing, funding limits, liquidity transfer pricing and the contingency funding planCorrect
  3. CThe stress test model is validated by the same team that built it
  4. DScenarios are kept unchanged for several years to allow comparability

Explanation

Use of results means linking outputs to buffer sizing, limits, pricing of liquidity and contingency funding triggers. Annual appendix reporting is passive. Self-validation breaches independence, and unchanged scenarios become stale.

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